Wednesday, February 5, 2014

Why The IRS Loves Auto-Gratuity

“An automatic gratuity of 18% will be added for parties of six or more.”
Back in the day, I bartended at an Italian restaurant.  It was during my time there that I learned about the joys of dealing with customers.
Which is why I’m sort of torn on the whole automatic gratuity policy that a lot of restaurants have.  
Personally, I almost always tip at LEAST 20%, knowing that this is the bread and butter for many servers and bartenders.  I know the challenges they face.  Been there, done that.  I know that for every 20-percenter like myself, there are 50 10-percenters.  Then there are the people who use Groupons and other coupons…only to leave 15% on the discounted bill, thinking for some reason they are being generous.  Or the people that instead leave notes telling the staff to “get a real job”.  Those are the same people who wonder why the bartender ignores them the next time they come in. 
By the same token, an automatic gratuity can be a crutch for lazy servers.  Why go above and beyond when you know you’re guaranteed 18%?  So again – I get it.  And that’s why I’m torn on the whole automatic gratuity debate.
Turns out the IRS LOVES auto-gratuity.  As a matter of fact, they love it so much – they’re now going to tax it differently.
Our marketing firm has the pleasure of working with a number of restaurants throughout Connecticut, Massachusetts and Rhode Island.  We have a division of The Silent Partner Marketing that focuses on restaurant marketing and restaurant consultation.  And this tax code change is something we’re receiving countless phone calls about as restaurant owners struggle to figure out how they’re going to deal with the new regulation.
Here’s the quick overview.  The Internal Revenue Service will now regard this automatic gratuity as wages – technically “service charges”, rather than gratuity.  That means restaurant owners will have to withhold a portion of their staff's pay for FICA and payroll taxes. 
Deep breath.  Before you start yelling and screaming that they SHOULD be taxed on it in this fashion, there are a few factors here to consider.
First of all, in most restaurants, servers pay out a percentage of their gratuity (automatic or not) to other members of the staff (bussers, bartenders, bar-backs, etc.). 
Second of all, in some banquet facilities, a portion of that automatic gratuity on larger parties will go to the staff member who organized the event or managed it along with those other members of the service team. 
Essentially, this creates a logistically mess for restaurant managers and owners.
Now here is the other side of the rule that many people aren't talking about.
The federal minimum wage for servers is set at $2.13 per hour (it's higher in a handful of states, including Connecticut).  But the restaurant is supposed to make up the difference between tips earned and regular minimum wage if the amount of the gratuity doesn't bring the server up to the standard minimum wage number.  I know.  It can be a little confusing.
One could argue that this IRS ruling should have helped restaurant workers by stating that automatic gratuities were not tips and could therefore not be applied to cover the difference between the server minimum wage and the standard occupational minimum wage.
The new tax code means many restaurants and bars will be eliminating the auto-grat policy entirely.  But the point of this blog isn’t to weigh in on whether the policy is right or wrong…it’s to make you aware of it.  Many restaurant owners are calling The Silent Partner Marketing asking how to deal with the changes in creative ways to ensure that the taxes are fairly and properly paid…but that the money is distributed properly and that the staff is protected.  Can’t fault a restaurant owner for looking out for his or her staff.
If you are someone you know is struggling to figure out how to incorporate these changes into your shop, drop us a line at  We’re happy to offer free guidance and advice.
And if you’re one of the guests who happens to hit up a bar or restaurant as part of a large group – and notice there’s no longer an automatic gratuity – make sure to take care of the staff.  Because I PROMISE you they’ll remember it.